How to decipher retirement plan fees

With erratic investment returns, it's a good idea to take renewed interest in investment fees and sales charges paid on retirement plans.

Most people never take the time to know what they're being charged in good economic times.

In a continuing economic slump, however, every nickel charged adds up.

Many fees don't show up on your monthly statement, but definitely affect what your company collectively pays for retirement programs.

Because of recent changes from the U.S. Department of Labor, employer plan managers will have greater access to information about fees they're paying so they can make more informed comparisons between plans they're considering for employees.

A second set of rules being reviewed by the labor department will affect individual investors. Once approved, all 401(k) investors will see fees for each individual mutual fund or related investment they've chosen.

There's also a transparency move affecting many mutual funds we invest in ourselves. In late July, the Securities and Exchange Commission proposed rules to let the "no load" mutual fund business charge 12b-1 fees, which are generally used to cover marketing costs.

It's important to know the various categories of investment fees as they all come out of your pocket. Following are the major fees paid by employers and individuals.

Employer-based plan fees:

Plan administration fees cover basic recordkeeping, accounting, legal and trustee services that all defined benefit and contribution plans have. Some plans, such 401(k)s, might charge for additional items like customer service operators, voice-activated customer-service systems and various customer and advisor services. Many fees are deducted directly from investment returns, but they might be billed separately.

Investment fees pay individuals who manage plan investments and need to be watched closely based on how much work goes into the management function. These amounts are generally a percentage of plan investments, but if a plan is invested largely in indexed investments that don't require as much active management, the fees should generally be lower.

Individual service fees cover an employee borrowing from their 401(k).

Mutual fund fees:

Sales charges, known as loads and commissions, are transaction costs paid for buying and selling shares in a mutual fund. Some fees are paid when you invest (referred to as a front-end load), or when you sell (known as back-end loads). You'll also hear terms such as deferred sales charges or redemption fees - they mean the same thing.

Management fees are referred to as account maintenance or investment advisory fees. These charges cover the cost of managing the fund and are expressed as a percentage of total assets. When comparing mutual funds, it makes sense to compare fees as well as performance. You'll also hear about 12b-1 fees, which may cover everything from broker commissions to marketing expenses. 12b-1 fees, currently under review from the Securities and Exchange Commission, might have the purpose of these fees made clearer. In some cases, funds referred to as "no-load" might instead charge a 12b-1 fee.

Annuity fees feature sales expenses, mortality risk charges and account management charges. You might also see surrender and transfer charges when an employer terminates the investment in a particular part of its retirement plan or when an individual withdraws an amount from an annuity contract.

The bottom line is that an informed investor is a smart investor. There are fees for a variety of things in the investment world. Identify them and ask for them in writing. They can make a huge difference to your retirement savings.

Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.